Federal Reserve Governor Bowman: Three Rate Cuts Should Happen in 2026 (with Algorithm Included)

Note: This article isthe speech given by Federal Reserve Vice Chair Michelle W. Bowman on January 30, 2026,at the SW Graduate School of Banking at SMU Cox, Southern Methodist University Cox School of Business, Oahu, Hawaii.The original title is“Outlook for the Economy and Monetary Policy”.

Bowman believes that the labor market is likely to deteriorate in 2026; when assessing core PCE, the impact of tariffs should be ignored. Thus, she thinks there should bethree rate cuts in 2026 (the specific calculation is written in theblue section of the article).

Below is the original text, with some pleasantries omitted.

Good morning, thank you for the invitation today... I will make some remarks on the economic situation and share my perspective on the outlook for monetary policy.

As we enter 2026, the economy continues to grow, and inflation is nearing our target. But beneath the surface, the labor market remains fragile. I will explain why I believe this fragility poses a greater risk, and what this means for the policy path.

Update on the Most Recent FOMC Meeting

At this week’s (January 27-28) FOMC meeting, my colleagues and I voted to keep the federal funds rate target range unchanged at 3.50-3.75%. Allow me to explain why I agreed to support this decision.I still believe that policy is at a moderately restrictive level and, looking ahead to 2026, my Summary of Economic Projections forecasts three rate cuts this year.In my view, the question at this meeting was the timing of these rate cuts, essentially weighing between two options: whether to continue removing policy restriction to reach my estimate of the neutral rate by the April meeting, or to move at a more gradual pace to bring policy to neutral within this year.(Editor’s note: The December 2025 FOMC meeting implied that rates had already returned to a neutral stance, and the median forecast of Fed governors was for one rate cut in 2026. Bowman believes the rate is still restrictive and should be cut three times.)

I do not believe the downside risks to employment have diminished, and I seeseveral signs that the labor market remains fragile. I could have voted to continue removing policy restriction(Editor’s note: meaning supporting a rate cut in January), to better hedge against the risk of further deterioration in the labor market. However, we have seen some signs of stabilization, and after a total of 75 basis points in rate cuts in the second half of 2025, in my view, we can take some time to “keep our policy powder dry” for a short period, to carefully assess how a less restrictive policy stance transmits to broader financial conditions and boosts the labor market. At the same time, given the statistical noise caused by the government shutdown, I am also reluctant to draw meaningful signals from the latest published data. Moreover, considering that two more inflation and employment reports will be received before the March meeting, I believe it is better to wait before taking action.

This was not a simple decision. Ultimately, considering that inflation remains somewhat elevated, I decided at this meeting to wait for the upcoming series of data in order to have a more definite understanding of how the economy may evolve in the coming months.

Current Economic Conditions

Since I provided a detailed assessment of the economic situation in a speech two weeks ago, today I will focus on a few key points and some new data. As the official economic reporting process normalizes, my view of the economy has not changed significantly, partly because I have not drawn much signal from the employment and price data given the increased measurement challenges following the government shutdown. The US economy has been resilient, continuing to expand at a solid pace, but I remain concerned about the fragility of the labor market. I also believe that as the tariff effects on goods inflation continue to fade in the coming months, inflation will fall back toward 2%.

In the third quarter of 2025, GDP growth strengthened as consumer spending accelerated. However, growth in the fourth quarter may slow, reflecting the government shutdown and weakening momentum in consumer spending, which is consistent with recent weakness in personal income. Disappointingly, residential investment also appears to have declined again in the fourth quarter.

Labor Market Conditions

Turning to the labor market, we have seen conditions gradually weaken over the past year, with rising unemployment and a slowing pace of payroll job growth. In the fourth quarter, private sector payroll job growth further slowed to around 30,000 per month, and weekly ADP data show that as of early January, job growth remained similarly sluggish—well below the levels seen earlier last year, and also below the level needed to keep the unemployment rate stable.

Although the unemployment rate edged down to 4.4% in December 2025 and has been relatively flat in recent months, it has risen by 0.25 percentage points since mid-2025. In addition, the Conference Board’s job vacancy index fell sharply in January to its lowest level since early 2021, indicating that the unemployment rate may rise again in the first quarter.

Over the past year, the labor market has become increasingly fragile,and may continue to deteriorate in the near term.Although there are some preliminary signs that the unemployment rate is stabilizing, it is too soon to assert that the labor market has stabilized, especially considering the extra statistical noise from the government shutdown and the current CPS response rate has dropped below the low point during the pandemic. Job growth is concentrated in just a few non-business service industries with low cyclical sensitivity, with the healthcare industry accounting for all private sector job growth in the past quarter.

In this low-hiring, low-firing, and insufficiently dynamic labor market (some call it “no job growth”), if businesses start to reassess their staffing needs due to weak economic activity, we may see layoffs rise rapidly. Although initial jobless claims remain low, the number of layoffs announced by the private sector increased substantially last year, and there are reports of a large number of additional layoffs in January, as we have heard from two large employers this week.

Inflation Developments

On inflation, given that the current elevated inflation mainly reflects the tariff effects on goods prices (which I expect to dissipate this year), we have made significant progress in reducing the underlying trend. Excluding these effects, the core PCE inflation rate should have hovered around 2% in recent months. The underlying trend of core PCE inflation appearscloser to the 2% target than the current data suggest.(Editor’s note: Her point is valid. Since the inflationary effect of tariffs is one-off, when calculating core PCE, the impact of tariffs should be excluded, focusing only on the trend of core PCE. Accordingly, the number of rate cuts should also be adjusted. As I previously showed, in December 2025, Fed governors expected core PCE to fall to 2.5% by the end of 2026, with a neutral rate around 0.8%, yielding a nominal neutral rate of about 3.3% for 2026. The current federal funds rate target is 3.5-3.75%. So only one more rate cut is needed in 2026. But if we ignore the impact of tariffs, the underlying trend of core PCE is close to 2%, not 2.5%. That means the nominal neutral rate is only about 2.8-3%. But the current federal funds rate is as high as 3.5-3.75%. Therefore, rate cuts should be made, and there should be three cuts.)

According to the latest consumer and producer price reports, core PCE year-over-year in December may be at or just below 3%, up from September. However, the trimmed mean indicators for PCE and CPI price indices from the Dallas Fed and Cleveland Fed suggest that the year-over-year core inflation rate continues to decline. The differences among these core inflation alternative indicators seem to reflect increased volatility in recent data, and unusually large price increases in small categories such as software and video streaming largely explain the rebound in the core PCE inflation index since September.

Economic Outlook

Looking ahead, my baseline expectation is that as monetary policy approaches a neutral setting, economic activity will continue to expand at a solid pace and the labor market will stabilize at a level near full employment. Less restrictive regulations, lower corporate taxes, and a more favorable business environment will continue to boost supply—mainly due to higher productivity—and will be sufficient to offset any negative impact of other policies on economic activity and inflation. I expect the supply-side policies I just mentioned, combined with strong momentum in AI-related investment, will continue to drive productivity growth and help ensure inflation remains on a downward path.

Path Forward

Regarding the outlook for monetary policy, after excluding the one-off tariff effects,inflation is close to 2%, while the unemployment rate is close to its estimated natural rate but faces downside risk. I still believe(interest rate)policy is at a moderately restrictive level. The downside risks to the labor market have not abated, and we should not overemphasize the latest unemployment rate readings.

I appreciate and support the language in the FOMC post-meeting statement regarding recent data, which appropriately describes the unemployment rate data as showing “some signs of stabilization.” It will take time to obtain clear signals about the stability of the labor market. My view is that we should continue to focus on the downside risks to employment, and the description of the labor market helps convey that we are not overconfident. History tells us that the labor market can appear stable—until it isn’t.

When considering the data to be released soon, I realize that first-quarter data tends to be more volatile. Therefore, in my view, if labor market conditions suddenly deteriorate significantly, we should not use this data as a reason to delay policy action. Similarly, if we see an increase in inflation in January, we should not react immediately, as this has been common in recent years and may reflect lingering seasonal factors or additional statistical noise from the government shutdown and persistent measurement challenges.

I am aware, and understand that other FOMC members may be concerned that inflation remains somewhat high and that we have not achieved our inflation target for some time. However, in the absence of clear and sustained improvement in labor market conditions, we should be prepared to adjust policy to bring it closer to neutral. We should also not suggest that we expect to maintain the current policy stance for an extended period, as that would imply we are not paying attention to the risk that labor market conditions could deteriorate.

Meanwhile, it is important to remember thatmonetary policy is not on a preset course. At each FOMC meeting, my colleagues and I will assess incoming data, the evolving outlook, and the balance of risks to achieving our dual mandate of maximum employment and price stability. I will also continue to meet with a broad range of contacts to inform my assessments of economic conditions and the appropriate policy stance.

Conclusion

As the economy continues to evolve, so too must policy. My focus will always be on acting early enough to preserve price stability and a strong labor market. Thank you again for the invitation today and for the opportunity to share my views. It’s a pleasure to connect with you all.